What’s going on?
As Janet L. Yellen’s term as the Chairperson of the U.S. Federal Reserve is set to come to a close in February next year, there has been intense speculation over the last few weeks about the likely successor to the post. According to recent reports, Jerome Powell, a member of the Fed’s Board of Governors who was appointed to the post during Barack Obama’s presidency, is expected to be named as the next Fed Chairman later this week. American economist John Taylor, President Donald Trump’s chief economic advisor Gary Cohn and former Fed Governor Kevin Warsh were the other prominent names doing the rounds earlier. The decision to replace Ms. Yellen has gained significance as the Fed is in the middle of tightening its monetary policy stance by raising interest rates and winding down the size of its balance sheet. Markets, in particular, keenly look forward to the decision as they try to guess if the Fed will continue to tighten and, if so, at what pace.
Does it matter?
The Federal Reserve and its Chairperson are usually thought to be completely independent and protected under the law from all kinds of political influence. Naturally, then, the worldview and policy decisions of the Fed chief are deemed by many to be of special importance to the economy. However, sceptics of this view point to the fact that the Chairperson is appointed by the President and hence cannot be aloof from politics by any stretch of the imagination. For instance, former Fed Chairman Alan Greenspan, who was once a gold-bug rallying vehemently against central banks, surprisingly changed his mind after becoming Chairman and presided over what eventually turned out to be an era of extraordinarily loose monetary policy. In this view, if it is politics that really matters when it comes to the selection of the Fed Chairman, it may be wiser for analysts watching the Fed to focus more on the President’s political priorities rather than on the Fed chief’s worldview.
What will matter?
Scholars who study the “political business cycle” have, for years, argued that the policies of central banks in democracies like the U.S. are influenced by the proximity of the next general election.
In other words, central banks tend to loosen policy as elections arrive closer in order to boost the economy and help the chances of the incumbent President. Politics, at the end, is what really matters.
Mr. Trump has been keen on projecting the rising prices of U.S. stocks and other assets, a direct consequence of the Fed’s zero interest rate policy, as a gauge of his economic success. He has also been a strong supporter of a weak dollar to boost American exports. The new Fed Chairperson is unlikely to opt for policies that might upset the President’s plan.
